Biden Administration Requests Congress to Extend Debt Ceiling Suspension

Deadline for Deferred Application of Debt Limit Agreed Two Years Ago Expires on July 31

President Joe Biden of the United States [Photo by AP Yonhap News]

[Asia Economy Reporter Park Byung-hee] On the 5th (local time), the U.S. Department of the Treasury requested Congress to extend the suspension period for the federal government's debt ceiling, according to a report by The Wall Street Journal (WSJ) on the same day.

In July 2019, the then Donald Trump administration and Congress agreed to suspend the debt ceiling for two years while expanding federal government spending. That suspension period expires on July 31. The Treasury Department stated that if Congress does not reach a new agreement regarding the debt ceiling, the federal government's debt ceiling will be enforced, preventing the government from issuing additional bonds to raise cash.

The Treasury Department said that if the federal government can no longer raise funds, it will have to operate the government through temporary measures. The temporary measures mentioned by the Treasury include withdrawing investments from pension funds or halting new investments. After the 2008 global financial crisis, the U.S. government operated the federal government temporarily several times by exceeding the debt ceiling.

The Treasury expects that government-held cash at the end of July, when the suspension period expires, will be higher than initially anticipated. This is interpreted as taking into account that tax revenues may be higher than expected due to a faster-than-expected economic recovery. However, the Treasury also noted that uncertainties due to the COVID-19 situation must be considered. It warned that it is difficult to predict how long the federal government can operate under exceptional measures due to COVID-19, and cash could be depleted faster than expected. It added that this would mean the U.S. government would be unable to repay principal and interest on U.S. Treasury bonds, potentially causing significant turmoil in financial markets.

Nancy Vanden Houten, Senior Economist at Oxford Economics, explained that while the timing of government fund depletion under temporary measures has been pushed back from the original September to the end of October, uncertainty about the depletion timing remains high due to COVID-19.

The U.S. Congress is scheduled to recess from the end of July and reconvene in September. The Treasury stated that an agreement on the debt ceiling is necessary before then.

The U.S. Congress established the debt ceiling regulation in 1917. Prior to that, the federal government had to obtain congressional approval each time it issued bonds. After setting the debt ceiling, the Treasury was granted the authority to issue bonds up to the limit without congressional consent. Since its enactment, the debt ceiling has been raised or revised 98 times.

The Democratic Party is expected to push for future increases in the debt ceiling. In March, the Democrats considered including a federal debt ceiling increase in the $1.9 trillion stimulus bill that was legislated but ultimately excluded it.

Meanwhile, the Treasury plans to borrow about $1.3 trillion over the next two quarters. Regarding bond issuance plans on the day, there were no significant changes, and the Treasury said it will proceed with the scheduled auction of $126 billion in long-term bonds next week. On the 11th, the Treasury will auction $58 billion of 3-year Treasury notes. On the 12th, $41 billion of 10-year Treasury notes, and on the 13th, $27 billion of 30-year Treasury bonds will be auctioned.

With President Joe Biden's large-scale stimulus plans being implemented or proposed, there is a continued need for substantial funding. There are also calls to reduce the scale of bond issuance due to concerns about the government budget deficit. However, the Treasury has stated that it currently has no plans to reduce the scale of bond issuance. Wall Street had expected that the Treasury might reduce bond auction sizes from as early as August.

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